806t  u  mr  ivd 


THE  CHIEF  CAUSES  OF  THE  FAIL- 
URE   OF    MUNICIPAL    TELE- 
PHONES   IN    GLASGOW 


BY 


V.  M.    BERTHOLD 


reprinted  from 

The  Quarterly  Journal  of  Economics 

Vol.  XXII.,  February,  1908 


.  .  .  THE  ... 

QUARTERLY  JOURNAL    OF  ECONOMICS 

Published  for  Harvard  University 

Is  established  for  the  advaftcement  of  knowledge  by  the  full  and  free  discussion 
of  economic  questions.  The  editors  assume  no  responsibility  for  the  views  of 
contributors^  beyond  a  guarantee  that  they  have  a  good  claim  to  the  attention  of 
well-inf or jned  readers. 

Communications  for  the  editors  should  be  addressed  to  the  Quarterly  Journal 
of  Economics^  Cambridge.,  Mass.j  business  communications  and  subscriptions 
{$J.oo  a  year),  to  Geo.  H.  Ellis  Co.,  2^2  Congress  Street,  Boston^  Mass. 

CONTENTS   FOR  NOVEMBER,   1907 

I.     MORTGAGE  TAXATION   IN  WISCONSIN      .......        T.  S.  Adams 

II.    THE   NATURE  OF  CAPITAL:    A  REJOINDER E.  Bohm-Bawerk 

III.  THE  RENT  CONCEPT,   NARROWED  AND  BROADENED  Frank  T.  Carlton 

IV.  AN    ILLUSTRATION     OF    THE     CONTINUITY    OF    THE    OPEN 

FIELD  SYSTEM P.  Vinogradoff 

Appendix :    Court  Roll  of  an  Oxfordshire  Manor 

V.     THE  TAXATION   OF   THE   UNEARNED   INCREMENT   IN    GER- 
MANY   Robert  Brunhuber 

Appendix :    The  Cologne  Ordinance  levying  an  Increment  Tax 

VI.  .THE    TEXAS    STOCK    AND    BOND    LAW    AND     ITS     ADMINIS- 
TRATION   E.  T.  Miller 

NOTES  AND  MEMORANDA: 

Political  Economy  and  Business  Economy:   Comments  on  Fisher's 

Capital  and  Income J.  R.  Commons 

The  Meetings  of  British  and  of  American  Economists T.  N.  Carver 

The  Massachusetts  Inheritance  Tax  of  1907 F.  W.  Taussig 

RECENT  PUBLICATIONS  UPON   ECONOMICS. 


CONTENTS   FOR  FEBRUARY,   1908 

I.    PROFESSOR  CLARK'S  EC6NCMICJS  . Thorstein  Veblen 

II.  THE  TAXA:i.iaN  Qf.INTi^NG-IF.LE  WEAL-TH  IN  MARYLAND    .  Jacob  H.  Hollander 

III.  MACHINERY**  AfVo*' :rHE.LABO^]sjR.s\.,_ T.N.Carver 

IV.  THE  STREET   RAILWAYS   OF  PHILADELPHIA      ....      Frank  D.  McLain 

V.     THE   COST  AND   THE   PROFITS   OF  STEEL-MAKING  IN   THE 

UNITED  STATES  J.  Russell  Smith 

VI.    THE  QUANTITY  THEORY  AS  TESTED   BY  KEMMERER   .  Warren  M.  Persons 

VII.     HOARDING  IN  THE  PANIC  OF  1907 A.  P.  Andrew 

NOTES  AND  MEMORANDA: 

A  Proposal  for  securing  the  Maintenance  of  Bank  Reserve  .  .    Charles  W.  Mixter 

The  Chief  Cause  of  the  Failure  of  Municipal  Telephony  in  Great 

Britain V.  M.  Berthold 

RECENT   PUBLICATIONS  UPON   ECONOMICS. 


THE  CHIEF  CAUSE  OF  THE  FAILURE  OF  MUNIC- 
IPAL  TELEPHONY   IN   GREAT   BRITAIN. 

Mr.  A.  N.  Holcombe  has  recently  discussed  in  this  Jour- 
nal* the  reasons  that  led  to  the  abandonment  of  munici- 
pal telephone  service  in  Great  Britain.  Having  explained 
the  situation  antecedent  to  the  establishment  of  municipal 
exchanges,  governed  largely  by  the  vacillating  policy  of 
the  British  Post-office,  which  might  be  fitly  described  as 
having  played  a  game  of  "blind-man's-buff"  both  with  the 
National  Telephone  Company  and  the  municipal  corpora- 
tions, the  author  reaches  the  following  conclusion:  **the 
general  abandonment  of  the  municipal  telephone  under- 
takings (thus)  cannot  be  adequately  explained  by  any 
technical  or  financial  weakness  for  which  their  managers 
are  responsible,  but  that  the  explanation  must  be  sought 
elsewhere." 

The  "elsewhere"  in  the  opinion  of  the  writer  of  the  above, 
or  the  real  cause  of  the  failure  of  municipal  telephone 
service,  was  its  discouragement  by  the  British  government 
through  the  failure  of  the  Post-office  to  enter  into  an  active 
competition  with  the  National  Telephone  Company,  which, 
it  will  be  remembered,  was  its  lawfully  created  licensee  and 
representative. 

I  do  not  desire  to  deny  that  the  action  of  the  British 
Post-office  hurt  the  municipal  telephone  traders.  But 
it  served  only  to  accentuate  the  troubles  in  which  they 
found  themselves  and  hastened  the  final  step, — the  abandon- 
ment of  an  unprofitable  and  losing  business.  In  other 
words,  the  managers  of  the  Post-office  soon  perceived  that 
municipal  telephone  service  was  neither  a  financial  nor 
technical  success,  and  that  a  triple  service  would  impede 
instead  of  assisting  the  development  of  telephony  in  Great 
Britain. 

'  In  Quarterly  Journal  of  Economics  for  AugUEt,  1907,  p.  645. 


273050 


:/: 


4»<>    « 

«     «    .>  C 


Mr.  Holcombe's  conclusion,  that  the  general  abandon- 
ment of  the  municipal  telephone  undertakings  cannot  be 
adequately  explained  by  any  technical  or  financial  weakness 
for  which  the  managers  were  responsible,  is  a  new  message 
to  those  who  have  watched  and  followed  the  rise  and  fall 
of  the  British  municipal  telephone  service.  The  inception 
of  that  service  was  not  as  enthusiastic  as  might  have  been 
inferred  from  the  charge  of  pronounced  and  general  dis- 
satisfaction with  the  existing  system;  for  after  the  pasage 
of  the  Act  of  1899,  when  any  municipality  could  have 
apphed  to  the  Post-office  for  a  telephone,  only  59  out  of 
the  possible  total  number  (1,334)  wrote  to  the  Post-office 
for  information,  41  after  searching  investigation  abandoned 
the  scheme,  13  took  out  a  license,  and  only  6  of  these  actually 
proceeded  to  establish  a  telephone  exchange.  Of  the  latter 
Tunbridge  Wells  sold  out  to  the  National  Telephone  Com- 
pany after  an  experience  lasting  but  a  little  over  a  year. 

Of  Glasgow,  as  the  largest  municipality  and  making 
the  largest  investment  and  possessing  weaknesses  common 
to  the  other  five  municipalities,  the  question  may  specifi- 
cally be  asked,  what  were  the  technical  or  financial  weak- 
nesses for  which  the  managers  of  the  municipal  telephone 
business  were  directly  responsible?  Briefly,  the  answer 
is: — 

(1)  Errors  in  organization.  The  adoption  of  exchange 
system  and  equipment  long  discarded  as  inefficient  by 
progressive  telephone  engineers. 

(2)  Errors  in  estimates  and  plans.  Here  the  most 
glaring  mistake  was  the  underestimations  of  the  cost  of  a 
subscriber's  line, — an  error  due  to  the  advice  of  the  expert, 
Mr.  A.  R.  Bennett,  who  in  1896  figured  the  average  cost 
of  a  subscriber's  line  as  £17,  and  changed  later  on  to  £18.16. 

In  May,  1904,  the  cost  per  subscriber's  line  had  grown  to 
£34  in  the  Glasgow  exchange. 

(3)  Errors  in  rates.  Again  relying  upon  the  same 
expert,  the  municipalities  adopted  an  annual  flat  rate  of 
£5.5,  about  one-half  that  charged  by  the  National  Telephone 
Company.     At   the   Glasgow   Telephone   Inquiry   held   by 


Sheriff  Jameson  (September  28-October  4,  1897)  Coun- 
cillor Alexander,  member  of  the  Glasgow  Corporation  Tele- 
phone Committee,  deposed  that: — 

Before  making  the  application  for  a  license,  the  CJorporation  Com- 
mittee had  laid  before  them  expert  information  which  satisfied  them 
that  an  efficient  telephone  serAice  could  be  supplied  in  Glasgow  for 
£5  within  a  mile. 

In  response  to  a  question  by  Mr.  Ashe,  M.P.,  if  the  com- 
mittee intended  to  supply  this  telephone  service  without 
imposing  any  burden  on  the  rates,  the  committee  answered 
^'Itis."i 

(4)  Errors  in  providing  none  or  insufficient  amounts  for 
depreciation  and  sinking  fund. 

The  managers  were  not  without  warning,  for  as  early  as 
December,  1901,  when  the  Glasgow  exchange  had  been  in 
operation  but  seven  months,  the  Marquis  G.  de  la  Touanne, 
a  well-known  telephone  engineer  of  the  French  Telegraph 
&  Telephone  Department,  also  a  foreign  member  of  the 
Institute  of  Electrical  Engineers  of  London,  wrote  as 
follows  to  the  London  Electrical  Review  (December  13, 
1901):— 

The  statement  of  Mr.  Provand  in  the  Times  of  November  30,  that 
Glasgow  is  earning  a  profit  on  £5.5  subscription  leads  us  of  the  metier 
to  seek  further  information,  for  no  other  large  city  has  been  able  to 
maintain  so  low  a  rate.  .  .  .  £5.5  less  10%  Post-office  royalty  leaves 
£4  14s.  Qd.  net.  I  take  the  ultimate  capital  cost  per  subscriber 
as  given  by  Mr.  Provand  at  £16,  but  I  think  no  telephone  manager 
will  accept  3A%  per  annum  as  a  sufficient  depreciation.  My  expe- 
rience is  that  if  the  service  is  to  be  kept  up  to  the  mark,  the  instru- 
ments and  switchboards  must  be  replaced  every  eight  years,  which 
means,  say,  12%  depreciation.  ...  A  little  more  arithmetic  shows  that 
every  (Glasgow)  subscriber  who  calk  forty-seven  times  daily  uses  up 
his  subscription  price  in  operator's  wages  alone. 

Then  we  have  also  management,  technical  staff,  repairs,  rent,  light- 
ing, heating,  and  all  the  multifarious  expenses  of  a  large  business 
enterprise  still  to  come.  But  that  is  not  all.  The  subscriber  who 
calls  20,  40,  or  80  times  daily  costs  more  than  £16  in  plant.  He  may 
cost  25  or  50,  and  the  depreciation  on  that   head  is   12%,  making 

'  London  Electrical  Re\new,  October  8,  1897. 


with  interest  15%.  The  £5  subscriber  will  thus  cost  about  £7  i>er 
annum  for  interest  and  depreciation,  say  one  and  one-half  times 
his  subscription  fee.  .  .  . 


Let  us  now  consider  the  several  sorts  of  error  more  in 
detail. 

(1)  Errors  in  organization.  Immediately  after  the  pass- 
ing of  the  statute  known  as  the  Telegraph  Act  (1899),  the 
Corporation  of  Glasgow,  which  in  1893  had  asked  the  Post- 
master-General for  a  license,  renewed  its  request  for  an 
exchange  to  embrace  the  whole  of  the  city  of  Glasgow  and 
four  outlying  districts,  covering  approximately  143  square 
miles.  This  license  was  granted  March  1,  1900,  and  (a 
fact  which  should  be  well  borne  in  mind)  at  the  Corpora- 
tion's own  desire  it  was  made  terminable  December  31, 
1913. 

Immediately  thereafter  the  Corporation,  under  the 
chairmanship  of  ex-Bailie  James  Alexander,  an  ardent 
advocate  of  and  believer  in  municipal  telephone  service, 
organized  a  telephone  department  and  appointed  Mr. 
Alfred  II .  Bennett  chief  engineer.  By  his  advice  the 
committee  adopted  what  is  commonly  known  among 
United  States  telephone  engineers  as  the  Law  or  call- wire 
system,  in  which  each  subscriber  does  his  own  ringing  up. 
As  operated  in  Glasgow,  a  maximum  of  twenty  subscribers 
used  one  wire  in  common  for  giving  their  orders  to  an 
operator  who,  with  a  receiver  held  to  the  ear,  watches  for 
calls  and  makes  the  desired  connection,  leaving,  however, 
the  ringing  up  of  the  party  called  to  the  calling  party. 
Omitting  a  lot  of  technical  troubles  inherent  in  such  a 
system,  it  is  evident  to  the  layman  that  one  line  fault 
might  affect  as  many  as  twenty  subscribers.  The  common 
call  wire  left  means  of  signalling  at  the  mercy  of  irresponsi- 
ble persons  who  considered  it  a  joke  to  hamper  operating 
work  as  much  as  possible.  Moreover,  whenever  the  insula- 
tion of  a  subscriber's  line  became  even  slightly  defective, 
his  Hne  was  inoperative. 

The  Law  system  was  well  known  in  the  United  States, 


where  it  had  been  in  use  in  several  large  exchanges,  notice- 
ably Philadelphia  and  St.  Louis.  On  account  of  its  tech- 
nical defects  it  was  speedily  superseded  by  the  common 
battery  system,  with  which  the  Philadelphia  exchange  was 
reconstructed  as  early  as  1897.  Ever  since  the  Law  system 
has  been  obsolete  in  the  United  States. 

It  took  but  two  years  to  demonstrate  the  inefficiency  of 
the  Glasgow  plant.  Driven  by  general  complaints  of  bad 
service,  the  Telephone  Committee,  as  early  as  March,  1904, 
let  it  be  known  that  a  general  change  of  the  sj^stem  was 
under  contemplation.^  To  carry  out  the  reconstruction, 
the  Telephone  Committee  at  the  next  meeting  of  the  Cor- 
poration recommended  that  they  be  authorized  to  borrow 
an  additional  £250,000. 

The  reconstruction  of  the  exchange  became  so  imperative 
and  required  such  large  unremunerative  additional  invest- 
ment that  the  Telephone  Committee^  (July,  1906)  recom- 
mended the  sale  of  the  undertaking  to  the  Post-office  for 
£305,000,  the  actual  expenditure  at  that  date  being  £360,- 
000.  In  spite  of  considerable  political  pressure  the  Post- 
master-General refused  to  pay  more  than  £305,000,  and 
added  that  he  could  not  keep  even  that  offer  open  for  a 
long  time.^ 

That  the  inefficiency  of  the  plant  was  one  of  the  main 
causes  that  drove  the  enterprise  on  the  shoals  is  corrobo- 
rated by  the  remarks  of  Mr.  James  Alexander.  In  mov- 
ing the  adoption  of  the  recommendation  to  sell  the  tele- 
phone undertaking,  he  said: — 

Another  objection  to  the  Corporation  continuing  to  work  the  tele- 
phone serN-ice  was  that  it  would  be  necessary  to  apply  to  the  Secretary 
of  Scotland  for  power  to  borrow  at  least  £100,000  in  order  to  make 
necessary  alterations  on  the  switchboard  and  to  carry  on  the  system 
and  meet  the  capital  expenditure  necessary  in  view  of  the  increased 
number  of  subscribers.  ...  At  present  the  Postmaster-General  would 
acquire  all  the  plant  of  the  undertaking,  but  if  the  Corporation  con- 
tinued till  1913  the  latter  would  buy  only  such  plant  as  was  suitable 

>  London  Electrician,  July  8,  1904.  «  Ibid.,  July  6,  1906. 

'  Ibid.,  July  13,  1906. 


6 

for  actual  requirements  at  that  time  of  the  Post-office.  They  must 
therefore  keep  in  view  the  fact  that  if  they  did  not  now  sell  to  the  Post- 
office,  the  Postmaster-General  in  1911,  when  he  acquired  the  entire 
National  Company's  undertaking,  .  .  ,  might  say  to  the  Corporation 
that  the  greater  portion  of  their  plant  was  not  suitable  for  the  actual 
requirements  of  the  Post-office  at  that  date,  and  that  therefore  he 
was  not  going  to  acquire  it."  i 


(2)  Errors  in  estimates  and  plans.  As  has  been  stated 
heretofore,  the  municipal  expert  had  figured  at  first  the 
cost  per  subscriber  or  subscriber's  line  at  £18.16.  This 
appears  from  the  evidence  given  by  Mr.  Bennett,  in  June, 
1898,  before  the  Select  Committee  on  Telephones. ^  In 
spite  of  the  firm  persuasion  of  the  municipal  expert,  the 
actual  cost  per  subscriber's  line  after  two  years'  operation 
of  the  exchange  had  risen  to  £35,^  exceeding  the  original 
estimate  by  nearly  100  per  cent.  And  at  that  time  the 
Telephone  Committee  was  already  seriously  considering  the 
reconstruction  of  the  obsolete  system! 

On  May  31,  1905,  the  London  Electrician  pubhshed  a 
complete  analysis  of  the  Accounts  of  the  Glasgow  Corpora- 
tion Telephone  department  from  1901  to  May  31,  1904, 
showing  that  the  capital  account  stood  at  £350,273,  and 
remarked  that  ''the  capital  expenditure  has,  therefore, 
risen  to  £36.13  per  subscriber,  as  against  £35.8  on  May 
31,  1904.  This  increase  is  intrinsically  small,  but  if  the 
matter  is  looked  into  close  it  is  more  significant." 
^  (3)  Errors  in  rates.  The  biggest  feather  in  the  munici- 
pal telephone  cap  has  always  been  the  offer  of  a  low  flat 
annual  subscription.  Indeed,  without  this  it  is  very 
doubtful  whether  even  the  Scottish  rate-payers  would 
have  taken  kindly  to  the  novel  experiment.  No  one  person 
has  more  persistently  advocated  low  flat  rates  and  asserted 
that  these  are  remunerative  to  municipal  exchange  work 

1  London  Electrician,  July  13,  1906. 

r  *  See  the  Minutes  of  Evidence  taken  before  the  Select  Committee  on  Telephones, 
June[l4,  1898. 

3  London  Electrician,  March  11,  1904. 


than  Mr.  Bennett,  and  it  is  due  to  his  advice  that  Glasgow 
adopted  the  £5.5  flat  rate  for  unlimited  use. 

Referring  to  the  first  annual  report  of  the  Glasgow 
Telephone  Committee  (September  11,  1903),  Mr.  Russell 
seriously  warned  his  fellow-members: — 

Last  year's  working  expenses  reached  £21.000,  making  a  total  ex- 
penditure of  £47,000  i^er  annum.  Now  last  year's  revenue  was 
£35,000,  and  assuming  that  they  could  increase  this  year's  revenue 
by  £5,000  without  any  increase  in  the  working  expenses,  they  would 
only  bring  this  year's  revenue  up  to  £40,000,  leaving  a  deficiency  of 
£7,000  per  annum.  Mr.  Bennett  in  Hull,  which  was  a  much  less 
expensive  place  to  telephone  than  Glasgow,  recommended  the  Cor- 
poration to  make  some  such  annual  charge  as  £5.15  or  £5.17,  but  the 
Corporation  of  Hull  were  going  to  charge  £6.6.  It  must  be  evident 
that  it  was  quite  impossible  to  continue  supplying  the  telephone  at  the 
present  rental,  except  at  a  serious  loss  to  the  rate-payers.  He  advised 
an  advance  to  £6.6  or  £8.8  per  annum  instead  of  £5.5  at  present.^ 

Again,  at  the  March  meeting  of  the  Glasgow  Telephone 
Committee  (1904)  the  subject  was  forced  by  Mr.  Russell 
upon  the  unwilling  ears  of  his  fellow-members,  the  speaker 
affirming  that  "the  accounts  had  been  kept  in  a  way  that 
even  the  auditors,  for  their  own  credit,  had  to  protest 
against  it."^  A  few  months  later  (February,  1905)  the 
palpable  inefficiency  of  the  plant  made  a  new  loan  for 
reconstruction  imperative,  and  here  Mr.  Bruce  Murray 
came  to  the  front,  exposing  the  situation:^ — 

The  whole  method  adopted  by  the  committee  from  the  day  they 
began  had  been  one  of  secrecy  from  both  the  Corporation  and  the 
pubHc.  .  .  .  They  expected  to  distract  attention  from  the  gross  inac- 
curacies of  their  preliminary  estimates  and  from  the  fact  that  the 
£5  rate  ivas  not  paying. 

The  same  urgent  demand  that  the  Telephone  Committee 
*' should  immediately  give  notice  of  an  increased  rate" 
to  avoid  a  serious  loss  on  the  undertaking  was  reiterated 

1  London  Electrician,  September  11,  1903.  -  Ibid.,  March  11,  1904. 

5  Ibid.,  February  3,  1905. 


by  Mr.  Russell  at  the  meeting  of  the  Glasgow  Corporation 
(September,  1905),  and,  as  usual,  went  unheeded. 

Finally,  in  July,  1906,  came  the  denouement.  The 
London  Electrician  (July  13,  1906)  editorially  commented 
on  the  sale  of  the  exchange  as  follows: — 

From  the  reports  that  have  now  come  in,  it  appears  that  the  Corpora- 
tion has  been  in  a  difficult  position.  .  .  .  From  the  negotiations  that 
hiave  taken  place  it  appears  that  the  Glasgow  Corporation  have  a  deep- 
rooted  objection  to  anything  in  the  shape  of  a  private  monopoly.  .  .  . 
It  is  a  question,  however,  whether  the  objection  is  worth  paying 
for;  at  least  heavily.  The  purchase  price  to  be  given  by  the  Post- 
office  for  the  telephone  system  is  £305,000,  involving  the  Corporation 
in  a  loss  of  about  £15,000,  whereas  the  National  Telephone  Company 
seems  to  have  made  an  offer  to  buy  the  system  at  such  a  price  that 
no  loss  would  fall  on  the  Corporation.  But  the  idea  of  the  municipal 
telephones  forming  part  of  a  private  monopoly  was  not  to  be  tol- 
erated, .  .  .  and  the  Corporation  are  to  sell  at  a  loss.i 

There  is  but  one  other  fact  worth  mentioning,  that  the 
Postmaster-General  refused  point  blank  to  bind  himself 
to  continue  in  future  the  low  flat  rate,  the  great  drawing 
card  of  the  Municipal  Telephone  Committee,  the  corner- 
stone of  the  enterprise.* 

(4)  Errors  in  providing  none  or  insufficient  amounts 
for  depreciation  and  sinking  funds.  That  a  body  of 
Town  Councillors,  entirely  unacquainted  with  the  intri- 
cacies of  managing  a  telephone  exchange  service,  should 
have  erred  in  neglecting  to  provide  a  proper  depreciation 
is  not  astonishing,  though  the  expert  adviser  would  have 
done  well  to  instruct  the  Telephone  Committee.  On  the 
other  hand,  it  was  Mr.  Bennett  who  decided  on  the  period 
for  which  the  sinking  fund  should  be  calculated.  At  the 
Glasgow  Telephone  Inquiry  (October  5,  1897)  he  was  asked 
by  Mr.  Salvesen,  the  attorney  for  the  Corporation: — 

"What  was  the  sinking  fund  which  you  had  in  view  to  cover?" 
Answer. — "It  was  intended  to  cover  the  capital  expenditure  at  the 
end  of  twenty-one  years." 

Q.  by  Mr.  S. — "But  the  license  had  only  fourteen  years  to  run?" 

'  London  Electrician,  September  14,  1906,  p.  869. 


9 

Answer. — "But  it  is  not  regarded  as  probable  that  at  the  expiry 
of  the  license  the  Corporation's  plant  would  become  valueless.  It  is 
not  at  all  certain  that  the  Post-office  would  refuse  to  take  over  the 
Corporation's  plant  at  a  reasonable  charge." 

As  a  matter  of  fact,  the  license,  as  has  already  been  men- 
tioned; at  the  request  of  the  Corporation,  had  been  made 
terminable  December  13,  1913.  In  spite  of  this  the  Tele- 
phone Committee  wrote  down  the  enterprise  on  the  basis 
of  a  thirty  years'  sinking  fund.^  The  necessity  of  a  proper 
depreciation  and  sinking  fund  was  clearly  pointed  out  by 
Bailie  Burrell,  at  the  discussion  of  the  first  Annual  Report 
of  the  Telephone  Committee  (September,  1903).^  He  called 
attention  to  that  clause  in  their  license  which  contained 
the  conditions  of  purchase  by  the  Post-office  of  the  plant 
of  the  licensee  December,  1913.  The  Postmaster-General 
bound  himself  to  buy  only  such  plant  as  would  be  suitable 
for  the  actual  requirements  at  the  expiration  of  the  license. 
The  speaker  then  asked  the  pertinent  question: — 

Were  the  Government,  for  instance,  likely  to  take  over  the  switch- 
boards, which,  as  the  engineer  informed  them,  had  a  Hfe  of  but  10 
years?  The  corporation  had  exactly  10  years  of  their  Ucense  to  run. 
The  hfe  of  the  instruments  might  also  be  well  placed  at  10  years 
But  the  cost  of  their  present  switchboard  and  instruments  was  £80.000, 
and  for  this  they  could  not  reasonably  expect  to  get  anything  from 
the  Government.  Figuring  in  other  similar  items,  the  total  amounted 
to  £101,000  for  which  not  a  single  farthing  might  be  received  at  the 
sale  of  the  plant.  Deducting  this  from  the  Capital  Value  £271,000 
left  £170,000,  and  how  much  of  that  sum  might  the  Government 
find  suitable  in  1913?  By  that  time  the  plant  would  be  10  years 
old.  Taking  the  average  at  11  years,  and  applying  a  depreciation 
but  3%  over  11  years,  this  meant  a  reduction  of  33%,  and  deducting 
one-third  as  depreciation  (57,000)  left  £113,000,  and  this  amount 
they  might  expect  to  receive  from  the  Government  in  1913.  Con- 
sequently, they  should  write  off  between  1903  and  1913  in  some  way 
the  difference  between  the  cost  of  the  undertaking  £271,000  and  the 
amount  they  were  likely  to  receive.  In  other  words,  they  should 
write  off  £158,000  or  £15,800  on  an  average  for  10  years.  The  accounts 
for  the  year  showed  that  they  had  but  £9,800.  How  then  could  they 
do  that  out  of  the  profits  of  the  undertaking?     Surely  the  time  had 

^  London  Electrician,  March  11, 1904.  ^  Ibid.,  September  11.  1903; 


10 

come  when  either  a  depreciation  fund  ought  to  be  started  or  a  much 
more  adequate  amount  be  placed  to  reserve. 

Such  sane  counsel  fell  upon  deaf  ears,  the  chairman 
of  the  Telephone  Committee  replying  ''that  all  they  were 
called  upon  to  do  was  to  write  down,  by  sinking  fund,  by 
depreciation,  or  by  reserve,  a  sum  sufficient  to  meet  such 
depreciation  as  would  exist  in  the  opinion  of  the  representa- 
tives of  the  Government  when  the  time  for  selhng  came." 

From  the  above  it  is  evident  that  up  to  September,  1903, 
the  Telephone  Committee  had  not  seen  fit  to  charge  the 
accounts  of  the  enterprise  with  one  cent  of  depreciation. 
The  London  Electrician  (October  23,  1903,  p.  3)  editorially 
referred  to  this  grave  error,  both  in  the  case  of  the  Hull  and 
the  Glasgow  municipal  exchanges: — 

The  Hull  Corporation  should  write  off  heavy  sums  for  depreciation, 
sufficient  to  pay  off  the  greater  part  of  its  capital  by  1911.  But  if  it 
does  this  it  will  be  difficult,  each  j^ear,  to  make  both  ends  meet,  and 
the  undertaking  will  become  a  burden  on  the  rate-payers,  .  .  .  This 
difficulty  has  been  evaded  for  the  present  in  Glasgow,  for  instance,  by 
writing  off  nothing  for  depreciation  (in  fact  there  the  capital  account 
was  even  swelled  by  including  in  it  the  cost  of  canvassing),  but  evi- 
dently this  is  merely  deferring  the  day  when  the  rates  will  be  called 
upon  to  pay  the  cost  of  an  unsuccessful  experiment. 

When  the  Glasgow  Telephone  Committee  issued  the  Third 
Annual  Report  of  the  undertaking  for  the  year  ended 
May  31,  1904,  the  auditors  felt  compelled  to  state  in  their 
certification  as  to  the  correctness  of  the  accounts,  ''The 
foregoing  Capital  and  Revenue  Accounts  and  Balance 
Sheets  are  correct,  subject  to  the  question  of  the  sufficiency 
of  the  provision  for  depreciation."  * 

After  the  issuance  of  the  Annual  Report  of  the  Glasgow 
Telephone  Committee  for  the  year  ended  May  31,  1905,, 
the  last  report  prior  to  the  sale  of  the  municipal  exchange, 
the  London  Electrician  published  a  complete  analysis 
of   the   accounts   of   the   Glasgow   Corporation   Telephone 

'  The    Corporation    of     Glasgow — Telephone    Department — Capital     Account 
»nd  Balance  Sheet,  31  May,  1904,  p.  10. 


Department.  From  this  only  a  few  lines  need  to  be  quoted: 
''Out  of  the  balance  of  £20,746,  £19,242  has  to  be  paid 
as  Interest  and  Sinking  Fund,  leaving  a  net  balance  of 
£1,504,  which  is  all  that  is  set  aside  as  depreciation.  This 
is  less  than  ^%  of  the  Capital  Expenditure."  ^ 

As  has  already  been  stated,  the  inevitable  result  due  to 
the  failure  of  setting  aside  a  sufficient  annual  depreciation 
and  sinking  fund  was  a  dead  loss  to  the  tax-paying  com- 
munity of  £55,000. 

The  Glasgow  Telephone  Committee  up  to  the  last  moment 
refused  to  learn  from  the  experience  of  expert  telephone 
engineers.  In  the  words  of  their  chairman,  they  "re- 
gretted that  the  Chancellor  of  the  Exchequer  and  the  Post- 
master-General had  not  seen  their  way  to  give  the  Corpora- 
tion back  every  penny  of  their  money,  but  if  the  Corpora- 
tion continued  till  1913  the  Postmaster-General  would  buy 
only  such  plant  as  was  suitable  for  actual  requirements,  .  .  . 
and  then  in  1913  (he)  might  say  that  the  greater  portion 
of  their  plant  was  not  suitable  for  the  actual  requirements, 
of  the  Post-office,  at  that  date."  ^ 

It  may  now  be  left  to  the  judgment  of  the  reader  whether 
the  general  abandonment  of  the  municipal  telephone  under- 
takings in  Great  Britain  can  or  cannot  be  adequately  ex- 
plained by  any  technical  or  financial  weakness  for  which 
their  managers  were  responsible,  and  whether  or  not  it  is 
necessary  to  seek  an  explanation  elsewhere.  No  doubt 
the  shifting  pohcy  of  the  EngUsh  government  contributed 
to  hasten  the  ultimate  result,  but  every  careful  student 
of  the  origin  and  management  of  the  municipal  exchanges 
in  Great  Britain  will  be  driven  to  the  conclusion  that, 
sooner  or  later,  these  enterprises  were  doomed  to  ruin  on 
account  of  the  technical  and  financial  weakness  with  which 
they  were  launched. 

Victor  M.  Berthold. 
Needham,  Mass. 

'  London  Electrician,  September  15,  1905,  p.  867. 
2  Ibid.,  .July  13,  1906.  p.  515. 


*  T 


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